Delta Reinforces Fears That Airline Recovery Still Far Off Destination
Delta Air Lines (DAL) - Get Report sounded the chime on Tuesday, warning investors of potential turbulence. But the company's guidance, like most in-flight choppy weather, is no reason for panic.
Atlanta-based Delta said early Tuesday that passenger revenue per available seat mile, a common industry metric, fell 5% in the second quarter, wider than the airline's forecast for a 4.5% decline. The airline also said its operating margin in the second quarter would come in at about 17%, compared to a previous forecast of 21% to 23%.
The disclosure sent shares of Delta down by 4% on Tuesday and sparked a broader decline in airline stocks as United Continental (UAL) - Get Report fell 3.4% and American Airlines (AAL) - Get Report declined by more than 2%.
The harsh stock reaction is a reminder of how skittish investors are about airlines right now, with concerns ranging from higher oil prices, global uncertainties and questions about domestic price competition weighing heavily on transport shares. Consensus among airlines and investors is that a recovery won't happen this year, and some are raising questions about how 2017 will go.
Delta has been among the more optimistic airlines, so any negativity from it is likely to impact the markets more than it would if it came from one of its rivals. Still, the reaction Tuesday seems overdone.
Worth noting the margin miss is almost entirely attributable to $450 million in added costs associated with settling the airline's remaining 2016 fuel hedges. And the airline telegraphed some of this guidance on June 8, saying that PRASM would be at the low end of its guidance or even "slightly worse" than what it had predicted.
JPMorgan analyst Jamie Baker. in a note. said that given the specifics of Delta's guidance he sees no reason to expect similar statements coming from United and American. But he does warn that this upcoming earnings season is likely not to be a rallying cry for airline stocks, saying he expects third-quarter guidance from the airlines "to be deliberately conservative."
Domestic operators like Southwest Airlines (LUV) - Get Report may be able to offer some reason for optimism, Baker wrote, but "given the uncertainty around Brexit and accompanying surge in the dollar, we believe Big Three managements will adopt a purposely conservative approach."
Airlines could use the quarterly call to telegraph another round of capacity cuts, a move that would be cheered by markets. But otherwise, keep your seat belts fastened.